S.Africa economy shrinks prompting recession fears

JOHANNESBURG - South Africa's economy has contracted for the first time since the global crisis five years ago, raising the spectre of recession in Africa's most developed economy.

Statistics South Africa reported Tuesday that the economy shrank by 0.6 percent in the first quarter, a stunning reversal amid a rapid boom elsewhere in the continent.

The South African economy has struggled to recover since the 2009 crisis and the possibility of another recession, two consecutive quarters of negative growth, is not being ruled out.

"This makes for grim reading," said Razia Khan, Africa's regional head of research for Standard Chartered Bank.

The first quarter contraction -- which is annualised and adjusted for seasonal variations -- was blamed largely on a slump in the mining sector and a significant drop in manufacturing.

Khan said the figures showed an end to a crippling a platinum strike, now in its fifth month, and serious economic reforms were "even more of an imperative."

"In their absence, growth might continue to languish at these weak levels."

The worse-than-expected data comes during the first full day on the job for South African finance minister Nhlanhla Nene.

The 55-year-old was sworn in as South Africa's first black finance minister on Monday, tasked with overseeing "radical" social and economic reforms in President Jacob Zuma's new five-year term.

Shortly after the release of Tuesday's data the rand fell almost one percent against the dollar, before regaining some ground.

With unemployment above 25 percent and inflation rising, policy makers will worry that unrest in the mining sector is spilling over and hurting confidence across the economy.

"Predictably, the weakness mainly came from a sharp plunge in mining production," said analysts at Nedbank. "But the economy's fragility was on display in most other sectors too."

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South Africa, Africa's most developed economy, has been hit by various strikes in recent months. PHOTO/AFP/Getty Images

No plan

Weaker growth could pose significant problems for Nene, who faces weaker government revenues as he struggles to balance the fiscal books amid the threat of a further credit rating downgrade.

South Africa is on the verge of "junk bond" status, which would raise the cost of borrowing for the South African government and prompt international investors to look to other faster-growing emerging markets in Africa.

Wide-ranging structural reforms in the form of the National Development Plan have been on ice since 2011, with the ANC struggling to convince union and communist allies to drop their opposition.

"Zuma's ANC does not have a consistent plan to grow the economy and create jobs," said David Ross, the opposition Democratic Alliance's spokesman on economics.

"On top of that, we have creeping corruption and an increasingly bloated civil service."

The shrinking economy will also pose serious problems for the South African Reserve Bank, which has seen efforts to curb inflation through higher interest rates held back.

"The weak growth performance was the primary reason why the SA Reserve Bank kept rates on hold in last week's (monetary policy committee) meeting," said Nazmeera Moola, economist and strategist at Investec Asset Management.

A quick rate hike could throw growth further into reverse.

In the last quarter of 2013 the economy grew 3.8 percent.

AFP